Cheniere Energy Partners, L.P. annual report, FY2016

Cheniere Energy Partners, L.P. — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. The filing also reports fourth-quarter results. The Partnership develops and operates the Sabine Pass LNG terminal, liquefaction project and Creole Trail Pipeline.

Business context and project status

• Trains 1 and 2 reached substantial completion and began operating in May and September 2016. Train 3 was in commissioning and had produced LNG; Trains 4 and 5 were under construction; Train 6 was permitted but had not reached a final investment decision.
• At year-end, Trains 3 and 4 were 95.5% complete overall and Train 5 was 52.4% complete. Expected substantial completion was Train 3 in first-quarter 2017, Train 4 in second-half 2017 and Train 5 in second-half 2019.
• Six third-party, 20-year sales agreements cover approximately 19.75 mtpa, about 88% of expected nominal capacity for Trains 1–5. Contracted fixed fees are expected to total approximately $2.9 billion annually once all applicable trains begin commercial delivery; LNG pricing also includes a variable component linked to 115% of Henry Hub.

Financial performance and position

Metric	2016	2015
Revenue	$1.100 billion	$270.0 million
Operating income	$250.4 million	$3.0 million
Net loss	$171.2 million	$318.9 million
Net loss per common unit	$0.20	$0.43
Operating cash flow	$(0.2) million	$(171.1) million
Investing cash flow	$(2.353) billion	$(2.975) billion
Financing cash flow	$2.524 billion	$2.591 billion

• Revenue growth primarily reflects commencement of liquefaction operations. 2016 revenue included $539.5 million of LNG revenue and $294.0 million of affiliate LNG revenue; regasification revenue was approximately $266.8 million, including affiliate revenue.
• Operating margin was approximately 22.8% in 2016, versus 1.1% in 2015, as operating income increased with LNG operations. The Partnership remained loss-making after interest, debt-extinguishment and other expenses; net margin was approximately negative 15.6%.
• Fourth-quarter 2016 revenue was $550.6 million, operating income $199.4 million and net income $85.3 million, or $0.07 per common unit. Full-year results remained a net loss.
• Net loss improved by $147.7 million year over year, principally on higher operating income and lower derivative losses and debt-extinguishment losses, partly offset by higher interest expense. Interest expense net of capitalized interest was $356.9 million, up from $184.6 million. Total interest cost was $841.0 million, of which $484.1 million was capitalized.
• Capital expenditures and other investing outflows were funded predominantly with debt. Year-end total debt was approximately $14.6 billion gross ($14.43 billion net on the balance sheet), compared with $11.8 billion gross at year-end 2015.
• Year-end cash and cash equivalents were zero; restricted cash was $604.9 million and was not freely available. Disclosed available credit commitments totaled approximately $2.49 billion across the 2015 SPL facilities, working-capital facility and 2016 CQP facilities, subject to facility terms and conditions.
• Total assets were $15.54 billion and partners’ equity $443.1 million at year-end. The filing reports no off-balance-sheet arrangements with a potentially material effect.

Material changes, outlook and distributions

• Compared with 2015, operations changed materially as Trains 1 and 2 entered service. LNG revenues began to be recognized after substantial completion; commissioning cargo proceeds earned before that point were recorded as a reduction of construction costs. Operating expenses and depreciation rose with operations.
• The Partnership refinanced debt during 2016: it entered into approximately $2.8 billion of CQP credit facilities and issued $1.5 billion each of 2026 and 2027 SPL senior notes. The refinancings repaid or prepaid earlier debt and supported project funding. Approximately $0.2 billion of debt was scheduled to mature in 2017, $2.6 billion in 2020, $2.0 billion in 2021 and $9.5 billion from 2022–2027.
• Management stated it expected available financing, commitments and operating cash flows to fund completion of Trains 1–5 and anticipated operating and debt-service needs. Completion depends on construction progress and financing. Train 6 would require an EPC contract, acceptable commercial arrangements and adequate financing; no FID had been made.
• Management expected LNG revenue and operating expenses to increase as additional trains became operational. It provided no quantified earnings or cash-flow guidance in the text summarized here.
• The quarterly common-unit distribution remained $0.425; the fourth-quarter distribution was paid in February 2017. The Partnership said it was not generating sufficient operating surplus each quarter to fund the common distribution from current operating surplus and intended to use accumulated surplus. No distributions were being paid on subordinated or Class B units. Class B units were expected to convert into common units after Train 3 completion, increasing potential dilution.

Risks, contingencies and unusual items

• Liquidity and leverage are central risks: unrestricted cash was zero, operating cash flow was approximately breakeven, debt was substantial, and construction remained capital-intensive. Debt covenants and subsidiary restrictions may constrain distributions and transfers of cash.
• Construction delays, cost changes, financing availability and customer termination rights could affect project completion and cash generation. Total estimated capital costs for Trains 1–5 were $12.5–$13.5 billion before financing costs and $17.0–$18.0 billion including financing costs, owners’ costs and contingencies.
• Customer concentration is notable: one SPA customer accounted for 77% of net LNG revenue in 2016, and approximately 99% of trade receivables were due from two SPA customers. Contract performance and creditworthiness therefore matter materially.
• A lawsuit filed in October 2016 challenges one Louisiana industrial property-tax exemption contract and seeks to invalidate it and recover taxes. Management assessed the likelihood of a material adverse effect as remote, but stated an adverse outcome could be material. Separately, subsidiaries were working with Louisiana regulators on self-reported permit deviations; management did not expect a material financial impact.
• A challenge to DOE authorization for non-FTA exports related to Trains 5 and 6 remained pending in federal court. The filing also discusses regulatory, environmental, weather, operational, commodity, interest-rate, counterparty and related-party risks.
• After year-end, SPL was assigned an investment-grade rating by Fitch, and in February 2017 entered an agreement to issue $800 million of 5.00% senior secured notes due 2037. SPL’s ratings upgrades also resulted in certain indenture covenants no longer applying.

Most important facts for investors to verify

• Actual Train 3–5 completion dates, costs, operating reliability and whether projected LNG deliveries and fixed-fee receipts commence as scheduled.
• Accessible liquidity after restricted cash, facility conditions, letters of credit, construction needs and upcoming maturities are considered.
• Debt-service capacity and covenant compliance, including the ability of subsidiaries to distribute cash to the Partnership.
• Customer concentration, counterparties’ ability to perform, and the cash contribution from affiliate LNG sales and other related-party arrangements.
• Potential dilution from Class B conversion and any additional equity issuance, alongside the sustainability and funding source of the common-unit distribution.
• Outcomes of the tax-exemption lawsuit, permit-deviation discussions and pending export-authority litigation.

Audit: KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective as of December 31, 2016.